Bank of Canada holds rates, dovish on inflation

The Bank of Canada building is pictured in Ottawa June 1, 2010. REUTERS/Chris Wattie

OTTAWA, (Reuters) - The Bank of Canada held its main interest rate at 1 percent on Wednesday and said the risks of low inflation loom as large as ever despite a faster-than-anticipated rise in prices, remarks that some economists interpreted as being dovish.

The central bank also flagged weaker-than-expected global growth and the possibility of slightly less underlying momentum in the United States, and noted that the Canadian economy grew only modestly in the first quarter.

Economists had been watching to see if higher inflation readings in April might cause Governor Stephen Poloz to tone down his concern about low inflation, but this did not appear to be the case.

“Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before. At the same time, the risks associated with household imbalances remain elevated,” the bank said in its policy statement.

“It has a bit of a dovish tinge to it,” Royal Bank of Canada currency strategist Mark Chandler said.

Analysts surveyed in a Reuters poll last week unanimously expected the central bank to keep its overnight interest rate on hold, as it has since September 2010. The median forecast was that the bank will not opt for a rate increase until the third quarter of 2015.

Total inflation in Canada rose to the bank’s 2 percent target in April, but the bank attributed that largely to temporary effects such as exchange rate moves and costlier energy.

Core inflation, which excludes volatile elements, remained “significantly below 2 percent” in April although it had drifted up, in part due to past exchange rate movements, the bank added.

The lower Canadian dollar and strengthening foreign demand should lead to a pickup in exports, the bank said, and improved corporate profits should boost business investment.

“I would see this as dovish, just pounding home the point that there are no rate hikes on the horizon,” he said. “I believe the message here to the markets is the bank basically welcomes a lower Canadian dollar.”

One factor the bank has in the past mentioned as keeping it from cutting rates is concern over a hot housing market and high levels of household debt.

Despite concluding that household debt remained high, the bank said on Wednesday: “There are continued signs of a soft landing in the housing market and a constructive evolution of household imbalances.”

The bank still expects excess supply in the economy “to be absorbed gradually as the fundamental drivers of growth and inflation in Canada strengthen,” it said.

The Bank of Canada’s next rate decision is on July 16, but Poloz will hold a news conference at 11:15 a.m. EDT (1515 GMT) on June 12 as part of a new policy to meet journalists after the release of the bank’s semi-annual Financial System Review.

Additional reporting by Andrea Hopkins, Solarina Ho and Cameron French in Toronto; Editing by Peter Galloway